Skip to content 
Understanding FIRPTA Withholding
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to ensure that foreign investors were taxed on the gains they made from owning and selling U.S. real estate. It’s a part of the Internal Revenue Code that can have severe implications for sellers and buyers involved in transactions with foreign parties. However, navigating the rules and regulations surrounding FIRPTA can be complex, hence the need for demystification. This article aims to break down and explain FIRPTA withholding from the point of view of Brightside Tax Relief, a nationwide tax relief company.
The Basics of FIRPTA
Born out of the concern that foreign investors were making lucrative profits off U.S real estate but not being taxed, FIRPTA represents an effort by the U.S. government to ensure an equitable tax policy. Under FIRPTA, a buyer of U.S. real estate from a foreign entity or individual is required to withhold up to 15% of the amount realized from the sale. The amount realized is usually the purchase price. This amount is then sent to the Internal Revenue Service (IRS).
Who is Impacted by FIRPTA
FIRPTA affects both buyers and sellers in a real estate transaction. Primarily, it’s designed to tax foreign persons on dispositions of U.S. real estate interests. A foreign person can be a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. It’s pertinent to note that U.S. branches of foreign corporations can also be subject to FIRPTA.
As for the buyer, or the transferee, they are the withholding agents. Whether a corporation, partnership, estate, trust, or individual, they are held liable by FIRPTA regulations and must withhold, report, and pay tax to the IRS upon property acquisition. If the buyer fails to comply, they may be held liable for paying the tax, a position no buyer wants to find themselves in.
Exceptions to FIRPTA
There are exceptions to FIRPTA. It may be classified under two categories – transaction-based exceptions and seller-based exceptions. For transaction-based exceptions, here are some scenarios where FIRPTA withholding may not be required:
1. If the property sold is for use by the buyer as a residence and the amount realized is not more than $300,000.
2. If the buyer acquires the property for use as a residence and the amount realized exceeds $300,000 but does not exceed $1,000,000, and the withholding rate is decreased to 10 percent of the amount realized.
3. If the seller provides a non-foreign affidavit stating under penalties of perjury that the seller is not a foreign person.
Seller-based exceptions are situations where the foreign investor/disposer is not considered a foreign person for tax purposes. This usually happens when the foreign investor elects to treat their rental income as effectively connected with a U.S. business.
Importance of Compliance with FIRPTA
FIRPTA is a tax law enforced by the IRS, and failure to comply could attract severe penalties. Compliance is, therefore, crucial for both buyers and sellers. Withholding agents are typically required to complete IRS Form 8288 – U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests and submit it to the IRS by the 20th day after the date of transfer.
In summary, FIRPTA is a complex facet of the U.S. tax code, but an important one to understand for any individual, domestic or international, involved in the U.S. real estate sector. Brightside Tax Relief stands ready to help you navigate these complexities and avoid any potential tax pitfalls.
Demystifying FIRPTA with Brightside Tax Relief
As a nationwide tax relief company, Brightside Tax Relief prides itself on providing expert guidance on FIRPTA regulations. With a thorough understanding of FIRPTA, we can help you comprehend these laws no matter the complexity of your circumstances. Our primary goal is to ensure that you make informed, beneficial decisions and navigate your real estate transactions with prudence and financial savviness.
